Keynes, Ideology, Pragmatism. In the 1990s the idea (or ideology) of letting the markets regulate themselves flourished. Alongside, travelled the belief that the size of the government should be contained, favouring a smaller public sector as the obvious thing to pursue. It was also interesting to observe the fashionable idea of the “expectational view of fiscal policy”. In other words, if cuts in government spending appear to the public as a serious attempt to reduce the public sector financing needs, there may be an induced wealth effect, leading to an increase in private consumption (the hypothesis being that citizens would expect fewer taxes in the future, so they could save less today and spend more today as well). In addition, the reduction of the government borrowing requirements diminishes the risk premium associated with government debt, contributes to reduce real interest rates, and crowds-in private investment. This would be the best of the worlds.

Interestingly, the possibility of the existence of expansionary fiscal consolidations had already been echoed in the so-called “German perspective” of fiscal consolidations, expressed in 1981 by the German Council of Economic Experts, while two economists, Hellwig and Neumann, also gave it a strong push in a paper published in Economic Policy in 1987. Such view would afterwards have an influence on the fiscal convergence criteria of the Maastricht Treaty, and on the underpinnings of the Stability Pact in Europe, calling for discipline of public accounts as a precondition for stable economic growth. We would be then in a world of “expansionary fiscal consolidations” and non-Keynesian effects. Sorry about that John Maynard, I bet you didn’t thought of this one during your times of Bedford Square, while strolling around Bloomsbury.

Being applied economists keen on gathering data and in trying to validate hypothesis, that’s what they did. Unfortunately, like almost everything in life, you have opposing opinions and results, and you can find your Keynesian effect as well as your non-Keynesian outcome. Funny enough, someone referred to this idea of expansionary fiscal consolidations as something that may occur if two conditions are met: i) the study is done by Italian economists, and ii) the study is about Nordic countries! I would not go that far, but it seems that a pragmatic approach to policy making is in order, cutting a fine balance between Keynes and liberal ideology. The simple, somewhat demagogical and simple query is: do we want to pay taxes to finance minimum subsistence social networks or to bail out private business, as for instance in the financial hiccups of 2008? In the end, and after full consideration, pragmatism should help and prevail when dealing with this “small” economics-market problem of allowing past private profits to become current public losses. Of course, that little thing of non-Keynesian effects and small government seems to have been kind of flushed away… At some point one wonders whether the best policy conclusions and advice are indeed the more solid ones or just the ones that were more convincingly argued in front of the right audience.